The EU Emissions Trading Scheme (ETS) is often considered the gold standard for cap and trade policy. The government sets a certain number of carbon allowances, and companies are allowed to trade allowances on a secondary market. Funds generated from carbon sales are invested into decarbonization technology and used to transition the EU to a low carbon economy. However, as reported by Politico, a wrench has been thrown into the gears of the ETS mechanism – lower than expected carbon prices. The article states:
“A generation ago, the EU made a big bet: It could climate-proof Europe by making companies pay for carbon pollution. There was just one problem. That bet hinged on carbon prices, which float with the market, reaching a certain level. And in recent weeks, that price has crashed right through the floor and settled in the basement.”
According to those market projections, carbon pricing should be around €75/tonne; however, as of the writing of this blog, prices are at €71.55, rallying from a low of a little over €50 in February. Politico notes that for every Euro the price dips, €724 million are lost in carbon revenue. This creates a serious funding challenge for the Union which relies on government funds for investing in new decarbonization technologies. Some observers are not worried about the current dip in carbon prices, and are confident that the price will be driven back up as the government continues to roll out policy mechanisms that raise the cost of carbon. However, if the price stays too low for too long, then these policy initiatives could be at risk due to lack of funding, thus driving down the price of carbon and decreasing revenues further. Take your pick – chicken or the egg?
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